By Dylan Emery The Luxembourg regulators are proposing to issue rules under which a product provider...
By Dylan Emery
The Luxembourg regulators are proposing to issue rules under which a product provider ought to compensate investors when investment breaches and valuation miscalculations are made.
The amount will be worked out by calculating what the NAV would have been over the period the errors were made and compensating according to the difference. It is hoped that by introducing these rules for the first time, compensation will be dealt with fairly and consistently by all Luxembourg providers.
Marie-Jeanne Chevremont, senior partner of PriceWaterhouseCoopers in Luxembourg, said: "We are now the leader in Europe for investment funds. This gives us new responsibilities."
There are two issues dealt with in the document - calculation errors and investment breaches. There is a school of thought that any error, no matter how small, is unacceptable. Chevremont is a little more forgiving: "Pricing error is the result of several factors - inadequacy of internal controls, management problems, accounting, communication and IT problems, or even the wrong application of valuation rules.
"However, NAV depends on the volatility of the markets, the availability of information and therefore it is necessarily inaccurate."
Beyond an acceptable margin, the NAV should be recalculated for the period during which errors were made and this is compared to the actual NAV. Compensation only happens when there is a material loss.
For investment breaches, the loss is calculated by referring to the performance of the fund if the breach had not taken place. If there are several breaches, the provider has to recalculate based on the net effect.
For both categories, a company can use another basis for calculating compensation, but only if it is in the interest of the investor.
Payment can be in cash or in shares in the fund. However, the final beneficiary is very often not known in Luxembourg, and so it must be the nominee shareholder who is reimbursed, and he will have to verify that the he has reimbursed the beneficiaries.
Possible compensation situations must be advertised in the press and the auditor of the fund must be informed as quickly as possible.
The auditor then has to make a special report on the error and can give their opinion on a suitable repayment plan.
They are also obliged to inform the authorities if the provider fails to do so for a length of time. The final version of the plans will be published in April.
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